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Advice to Clients Enforceability of Restrictive Covenants

By Joseph R. Marconi & Brian C. LangsJohnson & Bell, Ltd.Chicago

The Illinois Supreme Court recently issued its opinion in Reliable Fire Equip. Co. v. Arredondo, 2011 Ill. LEXIS 1836 (Ill. Dec. 1, 2011). The opinion enforced prior precedent that an employer’s legitimate business interest should be considered in deciding whether a restrictive covenant should be enforced, but it rejected the previously set “tests” and “formulas” employed by Illinois appellate courts in determining whether a legitimate business interest exists. Illinois lawyers should carefully consider the Supreme Court’s decision and reconsider their previous opinions to clients regarding the enforceability of certain covenants.

For years, Illinois appellate courts employed a "legitimate business interest" test to determine whether restrictive covenants signed by employees are enforceable. Under the "legitimate business interest" test, a court would only enforce an employee non-compete agreement if the employer can demonstrate a "legitimate business interest" – defined by the Illinois appellate courts to exist where: (1) the employer's customer relationships are near permanent; or (2) the former employee had access to confidential information through his employment. The court in Sunbelt Rentals rejected the "legitimate business interest" test as something "the Illinois Appellate Court appears to have created 'out of whole clothe'" and held that a court should only evaluate time and territory restrictions in determining whether a restrictive covenant is reasonable and should be enforced.

In Arredondo, the Illinois Supreme Court overruled Sunbelt Rentals because it failed to consider an employer's legitimate business interest in determining the enforceability of a covenant. The Supreme Court recounted its past decisions addressing the enforceability of restrictive covenants and ruled that a restrictive covenant will be deemed reasonable and enforced only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer; (2) does not impose undue hardship on the employee; and (3) is not injurious to the public.

Most interesting in Arredondo, the Illinois Supreme Court was critical of past Illinois appellate court decisions beginning with Nationwide Adver. Serv. v. Kolar, 14 Ill.App.3d 522 (1973) that sought to reduce the circumstances under which a "legitimate business interest" will exist to a precise test or formula. The Supreme Court rejected such an approach, but stopped short of overruling all of the appellate court precedent set over the past 30 years. Instead, that precedent "remains intact, but only as nonconclusive examples of applying the promisee's legitimate business interest, as a component of the three-prong rule of reason, and not as establishing inflexible rules beyond the general and established three-prong rule of reason."

Going forward, a court considering the enforceability of a restrictive covenant must consider whether a legitimate business interest exists "based on the totality of the facts and circumstances of the individual case." These circumstances include, but are not limited to, "the near permanence of customer relationships, the employee's acquisition of confidential information through his employment, and time and place restrictions." Most importantly, no one factor carries any more weight than any other, "but rather its importance will depend on the specific facts and circumstances of the individual case."

Obviously, given the Supreme Court's rejection of the often times rigid "tests" and "formulas" previously employed by the appellate courts in determining when a legitimate business interest will arise, lawyers should reconsider prior opinions provided to clients (employees and employers alike) regarding whether a given covenant is enforceable. The Supreme Court's approach announced in Arredondo is very fact specific and each client's individual circumstances need to be carefully considered in determining the enforceability of a covenant.